AMD recasts foundry deal to save cash

LONDON – Struggling processor vendor Advanced Micro Devices Inc. said it has renegotiated its wafer supply agreement with foundry partner Globalfoundries Inc., moving on to fixed-price wafer deal to reduce its costs during the fourth quarter and into 2013.

Under terms of the deal, AMD (Sunnyvale, Calif.) will be liable for a "take-or-pay" termination fee of $320 million, but Globalfoundries (Milpitas, Calif.) has agreed to accept a promissory note for more than half the amount.

AMD said it expects to start generating cash in the second half of 2013. The chip maker currently estimates that it will purchase wafers from Globalfoundries valued at $115 million of wafers during 4Q12, resulting in a saving $65 million. It expects to spend $1.15 billion on wafers in fiscal 2013. AMD also committed to purchase $250 million worth of wafers from Globalfoundries during the first quarter of 2014.

The reduced wafer supply for the fourth quarter is in line with declining demand for PC processors. AMD said it will go to a fixed-price wafer deal for the duration of 2013, thereby reducing its purchasing commitments for next year.

In addition, AMD said it will reduce R&D payments to Globalfoundries by approximately $20 million per quarter over the next several years as it moves off proprietary AMD manufacturing processes and onto standard Globalfoundries' CMOS process technologies at 28 nm and below.

AMD will be liable for a termination payment of $320 million related to a "take-or-pay agreement" with Globalfoundries stemming from the adjusted wafer purchase commitments in the fourth quarter. However, the impact is being spread over several quarters, with Globalfoundries agreeing to accept $80 million by Dec. 28, and a $40 million by April 1, 2013. AMD supplied a promissory note for $200 million that falls due on Dec. 31, 2013, to cover the remainder.

AMD said the termination fee would result in a net one-time charge of approximately $165 million.

"Today's announcement demonstrates that the long-term strategic partnership between AMD and Globalfoundries continues to benefit both companies," AMD CEO Rory Read said in a statement. "Globalfoundries' performance in meeting our delivery requirements in 2012 was strong, and they remain a strategic and important foundry partner moving forward."

Read added that AMD is "committed to develop and grow our business with Globalfoundries," adding that the wafer agreement "is another step we are taking to further strengthen our relationship with Globalfoundries as well as AMD's financial foundation."

AMD negotiated a fixed-price wafer deal with Globalfoundries' in April 2011, although that agreemeent was thought to have stemmed from low manufacturing yields for 32-nm circuits.